G.M., the U.A.W. and VEBA: Negotiating a health care trust

No better incentive than lost market share--and a huge corporate financial liability--to prompt invention in labor negotiations. General Motors, worried, understandably, about the rising burden of its health care responsibilities, not only for current workers but for retired workers and their families as well, and the United Auto Workers, recognizing that paying for these costs is moving beyond G.M.'s capacity given present trends all around, are both seeing the light and seeking a way out.

Negotiations, for example, are taking a new tact on health care. And, given that the G.M. contract will set the pattern for others in the industry, we may well see a major shift in what has been an industry largely resistant to change. While no terms have yet been reached on pay, working conditions and job guarantees--all tough issues in the current environment--reports coming from the negotiations suggest that the parties have agreed on a broad framework for managing health care costs. A health care trust, in this case, a voluntary employee benefit association (VEBA), would allow G.M. to transfer to the trust its $55 billion liability for health care coverage for workers, retirees and their families.

While agreement has not been reached on financing the trust, word from the negotiations suggests that likely funding sources are cash and G.M. stock but unlikely to contain contributions from G.M.'s pension plan, even though the plan is more than fully funded, because workers might resist any effort that appears to put pension payments at risk. The final amount will be determined when the entire contract package is put together and as an assessment of costs for other items in the contract are calculated.

In any event, the sum is expected to reach into the tens of billions of dollars. The greater the funding, of course, the less risk union members face. Trusts are funded at a discount to the liability, ranging from half to three quarters of it.

The major point of worker resistance is likely to be square on the source of the need for change: financing health care costs. Medical benefits can already be seen to be in jeopardy considering the huge liability and the current assets and earnings of the corporation and while bankruptcy seems unlikely, some observers are willing to entertain the possibility given how they assess the situation. Thinking of that possibility, it's of no small significance that in a Chapter 11 bankruptcy, pensions can be terminated and replaced with less expensive plans. A trust, on the other hand, is protected.

That G.M. is in the midst of cutting jobs and closing plants and expanding its operations out of the United States and now sells more cars and trucks abroad than in North America, which has been its biggest market for decades, creates a new order. Workers and their union leaders are more than aware of these developments, and others too, as competition in the global market has increased exponentially with major impact on the American manufacturing scene, and not only related to automobiles. 'Staying the course' or 'holding the line' looks less like a workable negotiation strategy in this environment.

A major shift of liability from G.M. would place the company--and its workers--on a more secure financial footing and so a health care trust looks like the way to go. And, considering that the liability for the industry expands to $100 billion if you include current and retired workers and their families at Ford and Chrysler, the trust concept looks like a winner.

If the VEBA and other terms of the contract are approved by workers at G.M., and Ford and Chrysler follow the pattern, the industry can breathe a little easier. All it needs to do, then, is to make cars that sell.